Johannesburg, 29 April 2016 — Global Credit Ratings (‘GCR’) has affirmed the final, public long term credit rating of ‘A+(ZA)’ accorded to the following Senior Secured Notes issued by Delta Property Fund Limited (the ‘Issuer’) under its R2bn DMTN Programme, and placed the rating on ‘Rating Watch’:
- R462 million, Senior Secured Floating Rate Notes, maturing 09 December 2016, stock code DLTB02.
The ‘Rating Watch’ is to reflect the potential negative impact on the estimated recoveries, arising out of the vacancy of two significant GLA properties, currently occupied by a state owned enterprise, with the leases set to expire in April 2016 and May 2016 respectively, should there be no new lease agreement in place in the short term. GCR will review the Transaction again after three months and notes that a continuous vacancy at the abovementioned properties may have a potential negative rating impact.
RATING RATIONALE
The rating was affirmed and placed on ‘Rating Watch’ as two of the SOE leases in the secured portfolio, which generate a combined 21% of annual rental flows, are due to expire in April and May 2016. The leases have not been renewed and Delta is still in negotiations to acquire new tenants. As such, GCR has assumed that no rentals will be recovered from these properties and will review the Transaction after a period of 3 months. Should the properties remain vacant, this may have a potential negative rating impact.
The Senior Secured Notes were issued under the Issuer’s R2bn DMTN Programme with Nedbank Capital, a division of Nedbank Limited, as the Arranger. The rating of the Senior Secured Notes was derived by applying a notching up approach, starting from the long term corporate credit rating of the Issuer. Based on fundamentals and prospects of the Issuer, GCR accorded a long term national scale corporate credit rating of ‘BBB+(ZA)’ with a ‘Stable’ Outlook to the Issuer. A rating uplift of 3 national scale notches was deemed appropriate in this particular transaction given the “Superior Recovery Prospects”, equating to a long term national scale rating of ‘A+(ZA)’ on the Senior Secured Notes. The rating of the Senior Secured Notes relies on the recoveries from the properties contained within the security portfolio, which is largely constituted by offices predominately occupied by Government, with some diversification benefits drawn from the inclusion of a number of industrial properties.
The rating accorded to the Senior Secured Notes relates to ultimate payment of the principal and interest (as opposed to timely, akin to an expected loss rating, which is a function of probability of default and loss severity). If the ratings accorded to the Issuer change, the rating of the Senior Secured Notes may also change, but potentially not in the same scale. The rating excludes an assessment of the ability of the Issuer to pay any (early repayment) penalties. For more information on the Transaction, please refer to GCR’s Delta Property Fund Limited R462m Senior Secured Floating Rate Notes Surveillance Report to be published on 29 April 2016.
NATIONAL SCALE RATINGS HISTORY
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ANALYTICAL CONTACTS
Mark Vrdoljak
Credit Analyst
+27 11 784 1771
Tinashe Mujuru
Junior Analyst
+27 11 784 1771
Committee Chairperson
Emma-Jane Fulcher
Sector Head: Structured Finance Ratings
+27 11 784 1771
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
- Global Structurally Enhanced Corporate Bonds Rating Criteria (Oct’15);
- Criteria for Rating Property Funds (Apr’15); Criteria for Rating Corporate Entities (Feb’16);
- Delta Property Fund Limited’s Corporate Rating Report (Jul’15);
- Delta Property Fund Limited R462m Senior Secured Floating Rate Notes – Tap Issuance Report (Mar’15).
RATING LIMITATIONS AND DISCLAIMERS
ALL GCR’S CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://GLOBALRATINGS.NET/UNDERSTANDING-RATINGS. IN ADDITION, GCR’S RATING SCALES AND DEFINITIONS ARE ALSO AVAILABLE FOR DOWNLOAD AT THE FOLLOWING LINK: HTTP://GLOBALRATINGS.NET/RATINGS-INFO/RATING-SCALES-DEFINITIONS. GCR’S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, PUBLICATION TERMS AND CONDITIONS AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE AT HTTP://GLOBALRATINGS.NET.
| Agent | An agreement where one party (agent) concludes a juristic act on behalf of the other (principal). The agent undertakes to perform a task or mandate on behalf of the principal. |
| Agreement | A negotiated and usually legally enforceable understanding between two or more legally competent parties. |
| Arranger | Usually an Investment bank that advises and constructs a transaction and acts as a conduit between the transaction parties: Client, Issuer, Credit Rating Agency, Investors, Legal Counsel and Servicers. |
| Bond | A long term debt instrument issued by either: a company, institution or the government to raise funds. |
| Capital | The sum of money that is used to generate proceeds. |
| Claim | A formal request or demand. |
| Conduit | A commercial lending entity that is established to purchase assets to securitise. |
| Corporate Credit Rating | A credit rating accorded to a corporate entity. |
| Credit | A contractual agreement in which a borrower receives something of value now, and agrees to repay the lender at some date in the future, generally with interest. The term also refers to the borrowing capacity of an individual or company |
| Credit Rating | An opinion regarding the creditworthiness of an entity, a security or financial instrument, or an issuer of securities or financial instruments, using an established and defined ranking system of rating categories. |
| Credit Rating Agency | An entity that provides credit rating services. |
| Credit Risk | The probability or likelihood that a borrower or issuer will not meet its debt obligations. Credit Risk can further be separated between current credit risk (immediate) and potential credit risk (deferred). |
| Debt | An obligation to repay a sum of money. |
| Debtor | The party indebted or the person making repayments for its borrowings. |
| Default | A default occurs when: 1.) The Borrower is unable to repay its debt obligations in full; 2.) A credit-loss event such as charge-off, specific provision or distressed restructuring involving the forgiveness or postponement of obligations; 3.) The borrower is past due more than X days on any debt obligations as defined in the transaction documents; 4.) The obligor has filed for bankruptcy or similar protection from creditors. |
| Floating Rate Notes | Debt securities that have a periodic interest rate reset in relation to the reference rate, i.e. JIBAR. |
| Issuer | The party indebted or the person making repayments for its borrowings. |
| JIBAR | Johannesburg Interbank Agreed Rate. A reference rate. |
| Lease | Agreement or temporary use and enjoyment of a corporeal thing (movable or immovable property) the whole or part thereof for rent. The essential elements of a contract of lease are: 1.) Undertaking of lessor to give the lessee the use and enjoyment of something; 2.) Agreement between the lessor and lessee that the lessee’s right to use and enjoyment is temporary; and 3.) Lessee’s undertaking to pay a sum or rent. |
| Lender | A credit provider that is owed debt obligations by a debtor. |
| Long Term Rating | A long term rating reflects an issuer’s ability to meet its financial obligations over the following three to five year period, including interest payments and debt redemptions. This encompasses an evaluation of the organisation’s current financial position, as well as how the position may change in the future with regard to meeting longer term financial obligations. |
| National Scale Rating | The national scale provides a relative measure of creditworthiness for rated entities only within the country concerned. Under this rating scale, a ‘AAA’ long term national scale rating will typically be assigned to the lowest relative risk within that country, which in most cases will be the sovereign state. |
| Notching | A movement in ratings. |
| Principal | The total amount borrowed or lent, e.g. the face value of a bond, excluding interest. |
| Proceeds | Funds from issuance of debt securities or sale of assets. |
| Property | Movable or immovable asset. |
| Provision | An amount set aside for expected losses to be incurred by a creditor. |
| Rating Watch | Indicates that a rating is under review for possible change in the short term and the movement may be either positive or negative. |
| Recovery | The action or process of regaining possession or control of something lost. To recoup losses. |
| Redemption | The repurchase of a bond at maturity by the issuer. |
| Reference Rate | A rate that is the basis of the calculation such as JIBAR. |
| Rent | Payment from a lessee to the lessor for the temporary use of an asset. |
| Securities | Various instruments used in the capital market to raise funds. |
| Senior | A security that has a higher repayment priority than junior securities. |
| Stock Code | A unique code allocated to a publicly listed security. |
| Structured Finance | A method of raising funds in the capital markets. A Structured Finance transaction is established to accomplish certain funding objectives whist reducing risk. |
| Surveillance | Process of monitoring a transaction according to triggers, covenants and key performance indicators. |
| Transaction | A transaction that enables an Issuer to issue debt securities in the capital markets. A debt issuance programme that allows an Issuer the continued and flexible issuance of several types of securities in accordance with the programme terms and conditions. |
| Ultimate Payment | A measure of the principal debt, interest, fees and expenses being repaid over a period of time determined by recoveries. |
| Under Review | Failure to carry out a full review of a rated entity within the designated timeframe, either through lack of information or delays in finalisation, i.e. review is ongoing. |
| Vacancy | In commercial property, usually expressed as a percentage of unoccupied floor space in relation to the GLA. |
| Valuation | An assessment of the property value, with the value being compared to similar properties in the area. |
SALIENT FEATURES OF ACCORDED RATINGS
GCR affirms that a.) no part of the rating was influenced by any other business activities of the credit rating agency; b.) the rating was based solely on the merits of the rated entity, security or financial instrument being rated; c.) such rating was an independent evaluation of the risks and merits of the rated entity, security or financial instrument; and d.) the validity of the rating is for a maximum of 12 months, or earlier as indicated by the applicable credit rating document.
The Issuer and the Arranger participated in the rating process via face-to-face meetings, teleconferences and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible.
The credit rating has been disclosed to the Issuer and the Arranger with no contestation of the rating.
The rating above was solicited by the Issuer of the Transaction; GCR has been compensated for the provision of the rating.
The information received from the Arranger and other reliable third parties to accord the credit ratings included the interim financials for the period ended 31 August 2015; an overview of the property portfolio serving as security for the Senior Secured Notes as per 29 February 2016; the applicable Valuation Reports effective at 29 February 2016; tenancy lease schedules as per 29 February 2016; the relevant executed Transaction documents, including the cession documents in respect of Regents Place; and the relevant final signed legal and tax opinions and a letter confirming non-dual cession.
